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5 fiscal cliff scenarios

Negotations on the fiscal cliff will open on Capitol Hill this week. | AP Photo

It would also become a bonanza for K Street and corporate America, which would use the next seven weeks to protect their interests.

Then there are entitlements. Both parties need to agree how far to cut treasured programs such as Medicare and Medicaid. Senate Majority Leader Harry Reid has said he won’t “mess with Social Security” even though Republicans and Democrats have considered changes to the program.

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Both parties think they have a good outline: Obama and Boehner’s framework from their 2011 talks. But as the speaker frequently says, it remains to be seen whether Humpty Dumpty can be put back together again.

3. Tax-free strategy

Given that tax cuts are the major sticking point, why not just remove them from the end-of-year equation?

Democrats could agree to the Republican demands to lift the sequester for a year if it is paid for in a balanced way. In return, Democrats would seek some kind of tax break along the lines of the payroll tax cut, which expires Dec. 31. The package could also deal with other unfinished business, like unemployment benefits, the automatic rate decrease for Medicare providers and the Alternative Minimum Tax.

If Congress were to address this list of items before Jan. 1, the cliff wouldn’t be so steep, mitigating the economic shock.

Even though Obama has called on Congress to deal with the middle-class tax cuts now, Republicans see no incentive so far to separate them from the rest of the debate.

4. Buy more time

This is the classic Washington solution: When a permanent fix proves too difficult, patch it up for a few months.

Congress has been doing this for years with the federal budget. So don’t be surprised if a growing number of lawmakers call for a six-month or yearlong extension of the status quo to give them more time to deal with it.

“The watchword up there might be ‘do no harm,’” said Jim Dyer, a former Republican House Appropriations Committee staff director and top congressional liaison for Presidents Ronald Reagan and George H.W. Bush. “Let’s at least not let things happen that damage the economy.”

At this point, Obama isn’t buying it.

He already agreed to one temporary extension, in 2010, of all the Bush-era tax rates. And he’s under immense pressure not to do it again.

Readers' Comments (190)

Ending of High Income Tax Rate Cuts - CBO: Ending Bush’s 2001 and 2003 income tax rate cuts on AGI income over $250,000, will reduce the deficit by $80 billion, saving over $950 billion, in debt, over ten-years http://bit.ly/Np7lGD

Payroll Tax Cut - The ending of the Payroll Tax Cut will reduce the deficit by $130 billion, saving over $1.5 Trillion, in debt, over ten years, and maintaining Social Security.

Unemployment Benefits - Expiration of the federally added unemployment benefits, for the long-term unemployed, will reduce the deficit by $26 billion dollars, saving over $300 billion, in debt, over ten years. http://1.usa.gov/TzwY3o

Capital Gains Tax Rate - current rate 15%. Beginning January 1, 2013, the capital gains tax rate will revert from the current 15% rate back to the former 20% capital gain tax rate that was in effect prior to the Bush Tax Cuts of 2003.

the top 1% of all taxpayers will receive 71% of all capital gains in 2012 -

the top 0.1%, alone, will receive 47% of all capital gains.

Federal Capital Gains Tax Collections, 1954-2009 http://bit.ly/RMxwqn

The capital gains rate of 20%, will reduce the deficit by an estimated $50 billion, saving over $575 billion, in debt, over ten years

Dividend Tax Rate - The Bush 2003 Tax Cuts, took two steps: First, they lowered the maximum rate on capital gains to 15 percent. Second, they tied capital gains and dividend income together, lowering the rate on dividends from the top income tax rate to 15 percent. These rates expire in 2013 – increasing the capital gains tax from 15 percent to 20 percent and more than doubling the top dividend rate from 15 percent to the ordinary income tax rate of 39.6 percent. http://bit.ly/SN62i1

Buzzm1: Thanks for the summary/links... But missing are links to spending commitments (other than unemployment), growth rates of spending/revenues and such "dynamic" scoring of the results.

Your summary well demonstrates the relative futility of a "tax the rich" strategy: capturing $80B/yr by ending the Bush Tax Cuts for those over $250k looks like peanuts compared to our deficit running well over 10 times larger that that every year.

Also, to put in context: QE3 "invents/injects" $40B every MONTH. If "wasting" $80B/yr "on the rich" is bad, why isn't "giving" the banks $480B/yr in unbacked/printed/invented money much worse?

For that matter, how do we count QE3 in the budget? Why even have a budget if we are going to print money when we can no longer raise it otherwise?

Oh, I realize the big QE3 bucks are in exchange for mortgage backed securities, but these are of questionable value, having, after all, beem the instruments that triggered the crash in the first place. Even if thaken at face value, these securities are being bought with printed money.

Traditionally, printing money is viewed as a hidden tax, reducing the real value of all we have and do by the value of the invented money injected into circulation. So is QE3 a $480B/yr tax on all of us?

Wait = Bill Kristol did say on Global-Television (since voters said Rate-Hike OK) that it would not hurt to do so, right?

Well, just in case House tries to say "Obstruct, No-way Hike but just keep cutting tax-rates for top usury-swapmeet folks."

Why not use the same "Campaign-Door to Door-Infrastructure" in House-GOP-Districts [Especially Eric Cantor (Commonwealth of Virginia District 7 is in Play via Henrico/Midlothian) and House Speaker Boehner (OHIO #8 in play f/2014-yup, w/more leverage)] to:

#1 Get voters on a Flash-call spree, mail-out-spree, email-spree, sign wearing march-on-Local GOP Offices and inform House Reps that even Republican Districts Voted To Let Top 1% Rates Expire to "Chip-in" a "More-Balanced-Rate/Share" of Debt Caused via Capital Gains/Hedge Wealth; thus, increase their own Millionaire-Tax Payments (Just a Smidgen and Less Than They All Spent in 2012-Elections.)

#2 Get Global Oil Corporate Boards "ON Board" w/ending subsidies to their more than adequate profits

#3 Get "Senior Citizens" On Board w/ "Means-Testing" f/Medicare

#4 Get "Lawyers" On Board w/ some adjustments to "TORT" (ie decreases Doctor's Insurance Costs) OK, you Liberals don't like it but ALL must get in the "Barber's Chair" ALL must get this "Haircut"

#5 Get "SBA" to draft a real small-business growth plan with an eye on "Innovation Not Hedge-Funds"

#6 Get All Energy Companies To Agree and Perform "Cost/Benefit Analysis w/Impact Statement" For "New US Elecxtrical GRID being Built Alongside Infrastructure Projects "

#7 Get All Higher/Trade Education-Institutions On Board w/ an "Education-Partnership w/Industries Needing Specific Skills" (ie as we did when IBM/Honeywell/CDC all trained f/new Computer Industry Workers)

Mr President,

Your leverage is w/Voters, not Congress; thus, as Scripture says, " . . . use what is given."

Keep your Focus,

ghost cricket

Sidebar: [ Of course eop must at least "Offer the plan to Eric and Speaker Boehner" via Democratic Leadership; yet, the tenor of language by Speaker Boehner indicates you must turn to 2014 Mid-terms as threat.]

The so called fiscal cliff isn't such a bad idea. Remember the President is holding all the cards. The taxes go up for the wealthy automatically, and I'm fairly positive the defense cuts will come exclusively from the RED states. Middle class people may see a tax increase but for most it won't be that noticeable. Any pain that occurs now won't be remembered in four years in the next election cycle - particularly if employment is up and the debt is down by then.

If I were the President I would concentrate on raising the capital gains and estate taxes to the same level as income taxes. The President could justify it as a tax on people who didn't actually do work for that money. He could use the same argument that the GOP used for welfare dollars - it wasn't worked for at a job and it wasn't earned - essentially welfare money. He would gain lots of support for this.

To fix Social Security he should propose taking the cap off, that is taxing an unlimited amount of income under the social security tax. This would make it solvent for the next 200 years.

He doesn't really have to deal with the GOP - he's in a position of power now. The red states will be screaming when they are all out of work due to sequestration and Obama can rest assured that they will be taking it out on their red state Congressmen and Senators in two years.

The fiscal cliff is a perfect storm to get something done and destroy the GOP at the same time.

What going over the 'fiscal cliff' would mean....reminds me of what president Bush said to get TARP passed:

"The government's top economic experts warn that without immediate action by congress America could slip into a financial panic and a destructive scenario would unfold. More banks could fail including some in your community. The stock market would drop even more which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm you would find it harder and more expensive to get credit. More businesses would close their doors and millions of Americans can lose their jobs. Even if you have good credit history it would be more difficult to get the loans you need to buy a car or send your children to college. And ultimately our country could experience a long and painful recession. Fellow citizens we must not let this happen."

Let it go "Over the Cliff" -- The President wants to punish the enemies he invented to win the election, and has to understand that he does not have "a mandate". The American people also need to see the damage the policies will cause -- we did a bi-partisan deal 10 years ago to get the tax rates we have had for a decade which had bigger tax cuts for the "poor" than for "the rich". Americans also need to see the fib of "bipartisanship" the President copied from Romney was a sham.

The President is so interested in this that he is ... taking a two week trip to Asia! Guess he wants no action and a trip over the cliff -- since every action always has campaign implications, it seems what he really wants is an issue for the midterm elections.

Not really . . . More Revenue Never Makes It To The US Treasury = every time a Progressive President or an Eisenhower-Republican goes along with this 3-Card Monte = The Minimum-wage earners, The Middle-Income Folk all get Screwed and we end up More in Debt; thus,

NONE of the- 5 scenarios are real or work = 60% of 2012 Voters Said, "Tax-Hikes For TOP make sense, are OK, and just do it."

Read Post # 4 above and add to that,

VA's 7th District possible 'flip' = Does Rep.Cantor know he endangers His Own Seat in 2014? (via fiscal-deal-opposition) .

Speaker Boehner, UN-opposed in #Ohio's 8th but if Cantor-Obstruction-Crew derails deal then w/great candidate then -

US-Voters Shall Unseat Them Both.

Sidebar: [ We are all tired of #4, #5 and #3 can only happen if GOP says OK to Extend Middle-income Bush-Rates]

Back in the 1990s we had full employment. The strong housing market led the way to achieve this. This strong economy balanced our federal budgets in the late 1990's. How do we turn our housing market around today? The following ideas may help do this.

First, the mortgage rates are at an all time low. Thus people have extra cash to spend on the economy after paying their low mortgage payments. They should continue promoting these record low mortgage rates to increase the health of the housing market.

Secondly, can they create new tax credits for those who make their homes more energy efficient? It may be installing better windows, doors, furnaces and insulation. This would not only create new jobs stalling these items; it would lower everyone's energy bills. Thus more cash would be made available to spend after these lower monthly energy bills.

Third, According to econ 101, whenever you lower the price of something, you will sell more of that something. Thus your total net profits will rise. However, if you lower your price too much, your net profits will become less. Calculus will indicate what price to set so these net profits are at its maximum. The same could be said of the price you are charged to sell your home. Currently, that cost is 6-7 percent of the price of your home. Can they lower this price so it will sell more homes for the same amount of time? According to econ 101, they can. Besides, with today's digital technologies, they no longer need to print expensive pamphlets. Can new tax credits be given to reduce this price to sell a home to let's say 3-4 percent, instead? Then this would help stimulate the housing market. Thus help stimulate our US economy.

Fourth, education is the key to reduce the dependency on entitlements. College costs were a lot lower in the 1990s than compared to today. They had much lower amount of people on entitlements. Today, graduates also have accumulated record high student loans debt. This decreases the ability to buy new homes and cars after graduating. So these higher tuition costs results in fewer people to get an education and higher student loans debt. Thus harms our economy achieves full employment like that of the 1990s due to this student loans debt.

Back in the 1990s we had full employment. The strong housing market led the way to achieve this. This strong economy balanced our federal budgets in the late 1990's. How do we turn our housing market around, today? The ideas above may help do this. This is just an opinion.

Face it, there is no painless way to pay off the national debt. Everyone is going to have to start to get use to paying more taxes and spending less.

If a family is in deep debt the only way to get out of it is 1. Bring in more income (work overtime, take a second job, send the wife to work) 2. Cut expenses (cancel HBO, consolidate driving trips, turn off lights, stop eating out, etc)

I'm not sure there really is a fiscal cliff ahead. Maybe some severe dips in the road, maybe a recessive slide if sequestration is allowed to happen. But we are talking about separate things. The Bush tax cuts and sequestration and tax reform are not related, nor should we allow the Republicans to mishmash them together. President Obama has already laid down his marker; He is rightly pushing the House of Representatives to pass -- now! -- the Bush tax cut extensions for 98% of Americans, as the senate has already done. House Republicans should do it, for Republicans need to show us proof positive they don't work exclusively for the richest if they truly want to rehabilitate their crazy party. I doubt House Republicans do the right thing; I expect them to wait and once again consider holding tax cuts for the vast majority of US hostage while making extortionist demands for more tax cuts for the richest. This won't work on Obama; he'll just let the Bush tax cuts expire, which will do no damage to the country and will provide needed revenue. It Republicans then won't vote for the Democratic legislation giving back those tax cuts to 98% of Americans, then Republicans will make the government richer, make a mockery of their idiotic Norquist pledge and will have to pay the political price at the ballot boxes once again.

The problem is that if you only cut expenses to balance the federal deficit, you will never reach your goal.

That's because Republicans refuse to cut the bloated 750 billion dollar a year Pentagon budget, refuse to cut yearly foreign aid to Isreal, refuse to cut the wasted war on drugs, refuse to cut spending on wasteful projects like a multi billion dollar fence on the Mexican border, refuse to vote to cut 10 billion dollars a MONTH we spend in Afghanistan etc etc etc etc.

Democrats love to TAX and SPEND

Republicans like to BORROW and SPEND....and that's what got us into trouble!!

Boehner stabbed the president in the back and turned a simple yes or no vote on debt ceiling into a night mare, all so republicans could win nothing but the bragging rights of an idealogical win. The government runs on tax dollar yet the republicans want to end collection taxes. How will the government run without taxes, on tea leaves and Kool Aid?

Any and all downsides will be the fault of Bush and/or the Republicans.

Adverse outcomes to anything will never be Obama's fault. He will always get an automatic pass.

let's put an end to this ridiculous whine, please.

When did or do republicans EVER take responsibility for anything and not blame liberals and Democrats?

And do you actually deny that Obama not only inherited a disastrous economic situation but also an opposition determined to deny him a second term no matter how it affected the country? Know your own party before you go judging others.

Finally, downsides are not the fault of Republicans or Bush or Democrats. Theyr'e the result of conservative/Reaganomics, aka trickle down, regardless of who (Dem or Repub) went along with them.

The margin of victory in the popular vote is one of the smallest for an incumbant president. I know you HAVE to say Obama has a mandate to make yourself feel better. Reality says something else.

Obamawon this election on the "small things," and the left claiming his agenda was endorced by a huge, mandate resulting portion of the American people is not supported by the historical or statistical evidence.....If you have data showing something different, I am ready to see it.

The only answer is to let all tax cuts expire. Last time Boehner made a deal, he backed out and we got the sequester. Don't trust the republicans, they always follow their pledge to Norquist instead of the American citizens that vote them into office. Just do it and take that hostage away from them.